High societies: Vancouver's multi-million retail marijuana market and the non-profit societies running it

Reefer retail is a growth industry in Vancouver, with annual revenues estimated in the hundreds of millions in Canada’s first major city to regulate dispensaries.

And, due to what a prominent cannabis lawyer calls a “peculiarity” of Vancouver’s dispensary regulations, millions of dollars of commerce flow through non-profit societies every year.

In Vancouver, where companies cannot apply for dispensary licences, most pot shops working their way through the city’s licensing process are incorporated as non-profit societies.

Applicants for licensing under Vancouver’s retail marijuana regulations, adopted in June 2015, must be either non-profit societies or personal business licences registered to individuals, said Vancouver’s chief licensing inspector Andreea Toma.

Kirk Tousaw, a lawyer who represents about 40 dispensaries in Canada, said the Vancouver approach, which seems to encourage societies while excluding companies, is “a peculiarity that has not been repeated in any other municipality that I’m aware of.”

The situation arose, Tousaw said, because the first handful of “compassion clubs” selling cannabis to patients in the 1990s, like the B.C. Compassion Club on Commercial Drive and the Victoria Cannabis Buyers Club, were organized as non-profit societies with community service mandates.

“The mission was to provide compassionate access at a time when this was a disfavoured activity, and there was a sense that setting up as a non-profit would assuage some of the public concerns about profiteering off of what was seen to be an illegal drug,” Tousaw said.

“Had there been no cannabis prohibition, obviously this plant would be treated like all other plants and all other commodities. But because of the historical context, because of the way the law and the reality on the ground has developed over the last 20 years, you do have this fairly unique situation.”

“In Vancouver, we’ve seen the successful operation of compassion clubs since 1997, so if that’s the model that council prefers to see in the city, that’s the model that doesn’t get the attention of police, that’s what we were trying to establish for Vancouver.”

Although police in some cities, including Vancouver, often allow pot shops to operate, they are illegal under federal law.

“It’s not common to have an industry characterized by non-profit organizations that are actively selling to the public,” said Lindsay Meredith, a marketing professor at SFU’s Beedie School of Business. “That’s just not common, that’s not a model I’ve seen anywhere, it’s not used in any kind of Western society as far as I know.”

“This must be a stopgap strategy by the city, to say ‘Look, we have to do something with these guys in the interim, and what we’ll do is we’ll call them societies at this point,'” he said.

A question that remains, Meredith said, is whether the retail pot sector will evolve with small, independent mom-and-pop operators like Vancouver’s societies, or with big corporate players like Shopper’s Drug Mart (which has applied to the federal government to be a licensed distributor of medical marijuana), or some combination of both.

“It’s an industry that’s just — bad choice of words — it’s growing like a weed, literally and figuratively, and the difficulty is we don’t have a regulatory structure in place to handle the beast,” Meredith said. “Is this a business? Is this a society? Is this some kind of NGO? Is it a medical dispensary operation? Businesses are sprouting up, and nobody’s got rules to handle the damn thing.”

Under B.C.’s Society Act, societies may be incorporated for religious, philanthropic, benevolent, educational, or sporting purposes, but not for “the purpose of carrying on a business, trade, industry or profession for profit.”

A society is allowed to carry on business “as an incident to the purposes of a society,” the act says, but “must not distribute any gain, profit or dividend or otherwise dispose of its assets to a member of the society without receiving full and valuable consideration except during winding up or on dissolution.”

Toma said city hall has not asked to review financial statements for any marijuana dispensary societies, because it would not be normal practice for the city to review figures for businesses, and it would be inappropriate to discriminate.

There is no evidence that directors of Vancouver’s pot societies are enriching themselves or conducting business inappropriately. But it’s not clear how any abuses would be monitored or prevented.

Asked how city hall can make sure societies are acting as true non-profits and not for the purpose of enriching their directors, Toma said the city looks to the province “to let us know whether (societies) are in good standing or not. That’s why it’s written in our bylaw, to be in good standing with the Society Act, because if they don’t submit their financials, if their financials are out of whack, then the province will not put them in good standing, therefore we use that to say they’re not meeting the condition of the license.”

The B.C. government oversees the Society Act, but does not regularly review financial statements for the province’s 27,000 societies.

Ministry of Finance spokesman Jamie Edwardson said: “The Society Act is a self-regulating statute, meaning that it’s up to members, donors, or the public generally to hold them accountable.”

If a society’s members have concerns about a treasurer, for example, the membership can vote that person out at the next annual general meeting.

If a society is not acting in the public interest, members of a society or the public can complain to the registrar, who can, in rare cases, be directed to investigate, Edwardson said.

Edwardson said “there doesn’t appear to be a real tax benefit” to running a society instead of a company.

There is a financial incentive for pot sellers in Vancouver to apply as a society. The city’s licence fee is $30,000 for “medical marijuana-related retail dealers,” and $1,000 for “compassion clubs,” which must be operated by non-profit societies in good standing. (Compassion clubs have additional requirements, including providing “non-marijuana health services” such as acupuncture.)

In Victoria, another municipality regulating retail pot, both companies and societies can apply for dispensary licenses, said Victoria city clerk Chris Coates. Victoria charges a $5,000 licence fee for every dispensary.

“The thinking was that if there was a two-tier license structure, with non-profits versus a normal business model, then we probably would see a tendency to have the non-profit model become the norm,” said Coates.

“The city is going to have to do the same amount of monitoring and inspection and enforcement, regardless of the business model, so there was no rationale that they saw that supported drawing a distinction between the two.”

As of this week, 21 Vancouver dispensaries have received a development permit (the step before the final business license) or a full licence from city hall. Of those 21, at least 14 (almost 70 per cent) appear to be connected to non-profit societies, corresponding with names of incorporated B.C. societies filed with the provincial government.

Registry records show that about half of those societies were incorporated within two months of Vancouver council passing the dispensary bylaw last year.

The fact that companies can’t apply for licenses in Vancouver has been a source of confusion for some budding potrepreneurs and their lawyers, and at least one Vancouver dispensary owner says the “non-profit” status doesn’t sit well with him.

Chuck Varabioff, owner of the B.C. Pain Society dispensary, said he would “prefer to be a company” instead of a society.

Varabioff, who opened one location in 2014 and another in 2015, said his business grew “busier and busier” even as competition ramped up dramatically during that time; according to the city, the number of marijuana-related businesses in Vancouver grew by 100 per cent per year from mid-2013 to mid-2015.

“I absolutely don’t buy the whole non-profit thing,” he said. “People don’t get into this industry to not make money.”

Tousaw, the lawyer, said after cannabis is legalized in Canada, the industry will have room for a range of entities, everything from large corporations to mom-and-pop businesses and true non-profits. Many dispensary societies today have a “mixed purpose,” he said, providing education and community benefits that fit with the non-profit mission.

“We need to get past treating cannabis as if it’s something different than other commodities. The same economic rules apply, the same business realities apply,” he said. “We need to start treating it like what it is, instead of some combination of plutonium and illegal drugs.”

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High societies: Vancouver's multi-million retail marijuana market and the non-profit societies running it

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